Europe Letter: Ireland on wrong side of global tax debate

The European Commission's ruling that Apple received illegal state aid from Ireland equating to €13 billion over a 10-year period presents one of the most serious challenges to Ireland's relationship with the EU since it joined the European Economic Community in 1973.

However, Ireland’s corporate tax policy has long been a thorn in the side of an otherwise harmonious relationship with Brussels.

Buried deep in the annals of EU state aid history is a case that first brought into the open simmering resentments about Ireland’s corporate tax policy.

In 1996 US pharmaceutical giant Boston Scientific said it was consolidating its European operations in Ireland, a move that resulted in the loss of hundreds of jobs in Belgium and Denmark.

The move provoked a furious response from both countries, resulting in then competition commissioner Karel Van Miert from Belgium being hauled before angry Danish and Belgian MEPs at the European Parliament. It also coincided with the emergence of tax competition as a serious policy concern in Brussels.

Manufacturing activity

While Ireland had agreed to abolish its 0 per cent corporate tax rate when it joined the union in 1973, it introduced a 10 per cent rate on manufacturing activity in 1980, followed by a similar rate for the IFSC seven years later. Both were introduced with EU state aid approval, under special rules that allowed struggling socioeconomic areas to use tax incentives to spur investment.

By the mid-1990s, as its economy was picking up, it was clear that Ireland would soon no longer qualify as a “less favoured” economic region.

Following tough negotiations with the European Commission, Ireland set out a plan to bring down the general corporate tax rate to 12.5 per cent and abolish the special manufacturing and IFSC rate over a number of years.

At this time the Code of Conduct Group on business taxation was also established by EU finance ministers. In 1997 they agreed to set up the forum, which was charged with examining unfair tax practices between member states.

Although non-binding, the group succeeded in effecting real change. It examined hundreds of tax measures across the EU, which ultimately resulted in the abolition of nearly 100 tax incentives across the bloc. While the group still exists, it has lost much of its bite, with the result that some MEPs have recently called for it to be strengthened in the wake of the Luxembourg leaks scandal.

Twenty years on from the Boston Scientific controversy, more cynical observers could be forgiven for detecting a hint of Danish schadenfreude lurking behind the recent Apple decision, given the nationality of the current competition commissioner Margrethe Vestager, who has become the bete noire of the Irish political establishment.

But on a more serious level, the clampdown on tax incentives through state aid in the 1990s should have been a warning sign for successive Irish governments of growing resentment that Ireland was luring investment from other EU countries through a low-tax regime.

Nonetheless, the decision to order a member state to recoup €13 billion in illegal state aid from a company is a watershed moment in EU competition policy which could have dangerous ramifications for investment into the EU.

Obvious question

The decision by the EU’s powerful competition arm to go after a deal struck 25 years ago poses the obvious question of which other deals will be now in the commissioner’s sights.

Further, the ruling is merely a sticking plaster that fails to seriously address the much deeper problem of global tax avoidance.

While the mantra at EU and OECD level on tackling multinational tax avoidance has been to link company taxation to where the activity and profits are generated, the Apple judgment fails to do this. Ireland is instead being told to recoup taxes for activity that is, in fact, taking place elsewhere, either through R&D in the US or through sales throughout Europe.

The fact that Vestager urged other EU countries to recoup tax to which they feel they are entitled in the same breath as she announced that Ireland was due €13 billion in unpaid taxes suggested that the commissioner was undermining her own argument.

But for Ireland, whatever the legal arguments or concerns about the European Commission overstepping its remit by tackling a member state’s tax regime through EU competition rules, politically Ireland is on the wrong side of the global debate about tax. Securing support for Ireland’s position from other EU member states will be a difficult task in the months and years ahead.